Canada’s dollar is emerging as the Group of Seven currency with the most at stake as traders debate whether the U.S. Federal Reserve will announce a reduction in its unprecedented monetary stimulus as soon as today.

The loonie and U.S. 10-year Treasury notes yields are the most inversely correlated since August 2004, increasing faster in 2013 than any other G-7 peer apart from the U.S. dollar. That means any rise in U.S. yields should the Fed taper its $85 billion in monthly bond purchases may weaken Canada’s currency, which is already down 6.5 percent this year.

The Canadian dollar is particularly sensitive to Fed policy because the countries are each other’s largest trading partners. The correlation increased as the U.S. considered reducing stimulus and the Bank of Canada stepped back from a pledge to move interest rates higher.

“We’re in the process of seeing a divergence in monetary policy,” Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investment Management Inc., said in a Dec. 16 phone interview. “Canada can be expected to keep a very loose, accommodative monetary policy, in contrast to the Fed, which is set to start its tightening cycle.”

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